DBS Group Research analyst William Simadiputra is keeping “buy” on Bumitama Agri P8Z and First Resources (FR) EB5 with lower target prices of 90 cents and $2 respectively amid recovering crude palm oil (CPO) prices.
In his July 11 reports, Simadiputra notes that both planters’ share prices have room to improve in 2HFY2023 on the back of rising CPO price trend flowing through its earnings performance.
He adds that global palm oil price recovery in 2H2023 and 2024 will be supported by decent soybean oil price outlook, which the analyst believe will remain in good balance due to stable supply and demand outlook of soybean.
Following the improving earnings trend in 2024, Simadiputra believes Bumitama Agri’s share price can perform even better going forward. Currently, the company has an undemanding valuation at FY2024 PE of 5.4x, which is a 30%- 40% discount versus its older plantation companies’ peers.
To account for DBS’s new CPO price assumption, Simadiputra has revised down his FY2023 earnings estimate for Bumitama Agri by 22% to 1.6 trillion rupiah ($141 million) while revising up his FY2024 earnings estimate by 18% to 2 trillion rupiah.
The analyst assumes 9,737 rupiah per kg CPO price in 2023 before improving to 9,889 rupiah per kg in 2024 on higher CPO price benchmark trend.
Given its prime age palm oil trees production cycle that will keep the overall cash cost low and CPO yield per hectare high, Bumitama Agri should sustain its strong financial and return on equity performance beyond 2024, says Simadiputra.He adds that the company could generate a steady annual dividend of at least 2 cents per share in the long run.
Meanwhile, FR’s share price trend and valuation at the current level is implying that the market has not priced in the recovering prospect of palm oil price and earnings performance. Simadiputra notes that the share price has been weak since 2022 dividend distribution due to lacklustre CPO prices, which has remained sideways in 1Q2023.
FR is currently trading at FY2024 PE of 9.5x, which is below its five-year average PE multiple. “We believe one should cast their views further on the potential impact of the emerging El Nino that could reduce CPO production and hence lift prices in 2024,” says Simadiputra.
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DBS has revised down FR’s earnings estimates by 29% and 16% in FY2023 and FY2024 respectively to US$144 million and US$186 million. This is mainly on weaker than expected profitability trend and CPO price trend seen in the first half of the year.
Simadiputra conservatively assumes FR to register lower CPO production volume in 2024 mainly on the emerging El Nino event, which may hinder young trees yield expansion potential amid the unusual dry weather.
As at 1.16pm, shares in Bumitama Agri and First Resources are trading at 59 cents and $1.51 respectively.
